Indebted Inchcape axes dividend and taps investors for £232m

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Inchcape, the international car dealership, is scrapping its dividend and proposing a massively discounted and deeply dilutive £232m rights issue to help pay down its £408m debts.

The group is the latest in a long list of companies pounded by the savage downturn in the global motor industry.

Annual results for 2008 published yesterday showed sales up by 3.4 per cent to £6.3bn but profits before tax down by 55 per cent to £108m as the operating margin dropped from 4.4 per cent to 3.8 per cent. Alongside the gloomy figures and "extremely challenging" market predictions for 2009, Inchcape also announced plans to issue more than 4 billion new shares on a nine-for-one basis at a price of 6p, which represents a discount of 88 per cent to the group's closing price the previous day.

The money will be used to reduce the group's gearing, give it greater flexibility within existing facilities, and delay refinancing until the end of 2012. It will also strengthen Inchcape's capital structure, differentiate the group, and position it to gain market share during the downturn, says the company.

André Lacroix, the chief executive, said: "Recent market conditions have been unprecedented and extremely challenging, affecting the entire car industry on a global basis. Raising new equity will allow us to reduce our debt and improve our financial headroom."

Inchcape, which operates in 26 countries, has had a torrid few months . The group has cut around 2,000 jobs from its global workforce, put in place a group-wide salary freeze and ditched all management bonuses, saving £58m per year. Inventory has also been cut by £175m, and £40m lost from capital expenditure plans. The moves brought the overall debt down by £132m between September and December.

The company is fully compliant with its only debt covenant, which requires profits to be maintained at three times interest payments. The directors did consider renegotiating the terms of the covenant, the company said yesterday. But, given the state of the market, a rights issue is considered to be a better option.

Although car markets are expected to remain grim well into 2010, income from Inchcape's services and parts businesses – along with lower costs, lower interest rates and currency benefits – will help.

"The board has concluded that, given the current conditions in the debt markets, any renegotiation is likely to result in significantly increased finance charges, not improve the available headroom under the financial covenant and cause the group to incur material one-off fees," the company said.

Shareholders will vote on the rights issue proposal at a general meeting on 6 April. The scheme is fully underwritten by Merrill Lynch, HSBC and RBS Hoare Govett.